Investors Fighting Back as a New Era of Unregulated Greed Unfolds
As you may have noticed, the news is pretty crazy right now. The volume is ear-splitting and we only have so much bandwidth. A lot of important stories are eluding notice. One thing you might not have heard about is the pretty fundamental shift that’s taking place right now in the way people are investing their money.
As Congress works to erase Dodd-Frank, investors are wising up and shielding their money from Wall Street molestation by putting it into low cost index funds.
Like, in droves.
Moody’s issued a report this month that says within the next four to seven years, more than half the assets in the investment management business will be in index funds, rather than actively managed funds. This is a pretty monumental shift. What is the root of this financial awakening? It all starts with retirement.
Most average investors have the bulk of their investments in retirement savings.
Many are not particularly pro-active when it comes to managing their nest egg. If they have a 401K, they don’t look at it. Or they allow retirement advisors to mange their IRA. Ordinary investors who aren’t particularly savvy or don’t pay very close attention were about to receive some protection from financial chicanery thanks to the Obama-era fiduciary rule, which would have required financial professionals to put their clients’ best interests first when giving advice on retirement investments.
Wait, this wasn’t already what financial advisors were supposed to be doing, you say?!
Nope. Wall Street makes money by preying on unsophisticated investors and selling them crappy, expensive products. They earn money from commissions, which they get whether your investment wins or loses. And it’s not all just handsome Dicaprio-esque brokers selling penny stocks. Your boring, not-at-all-handsome account rep at Fidelity trying to sell you that annuity could be just as big a thief. The fiduciary rule was intended to prevent conflicts of interest, thus protecting people’s crucial retirement savings from Wall Street’s inherent greed.
But we know how the White House and Congress view conflicts of interest.
“Yawn!” So on February 3rd, the president signed a memorandum, much sought-after by Republicans in Congress, that instructs the Labor Department to delay the fiduciary rule, which was supposed to go into effect in April. Trump’s National Economic Council director (and former Goldman Sachs President, because irony will never die), Gary Cohn, said that the fiduciary requirement “limits investor choice” and he compared it to a menu with “only healthy food.”
Which is an interesting perspective, given that most investors would probably choose to put their retirement savings into a chopped salad, rather than, say, an Arby’s “Meat Mountain,” if they they understood that this was a choice that were supposed to be actively making.
The problem is that the least savvy investors do not understand this.
They need the fiduciary rule. If a Wall Street millionaire wants to eat a room temperature Clams Casino hedge fund from the deli, what’s to stop her, Gary Cohn? Certainly not the fiduciary rule… it doesn’t stop those who wish to take financial risks from doing so. It protects the retirement accounts of inexperienced investors.
Every major news outlet is on record in support of the fiduciary rule, including the Wall Street Journal. Yet, its fate remains in question while Congress focuses on protecting profits at Goldman Sachs, the former employer of seemingly half our current government, rather than consumers or small investors.
So how does the little guy invest in the era of unregulated greed?
Here’s the good news… tell your grandma. It’s as simple as ever. The average person may think that if they don’t know what a credit default swap is (even after watching The Big Short), they had best put their money into the hands of professionals. But it’s not true. I fell into the trap of never looking at my 401K and I’m educated, generally savvy and endowed with my fair share of common sense. I assumed that it was all taken care of, with the best possible outcome assured.
But after reading this excellent Forbes article by John Wasik, I finally looked at my 401K last year, and realized that I was being robbed blind. Once I realized that I, like many people, suffered from crappy 401K syndrome, I told my employer they should get a new a one that offered index funds, which perform better and have lower fees. They are the literal definition of a “no-brainer.” When this change did not materialize, I rolled my money over into an IRA. I manage the money myself and it is growing much faster now.
“Trump Can’t Stop the Retirement Revolution” -Bloomberg News
“Investors yanked $340 billion from actively managed funds last year, according to Morningstar, and poured $505 billion into index and exchange-traded funds, which typically cost far less and come without added sales fees,” says this recent Bloomberg Businessweek story. It is an excellent read and shows why, nevertheless, we still need the fiduciary rule to protect novices and vulnerable investors, such as the elderly. The good news is that, because irony never dies, the fiduciary rule’s potential extinction has generated lots of news stories like the one above, and educated many people about the superiority of index funds over managed funds.
Even Warren Buffet will tell anyone who will listen to just put their money in the S&P.
He is a vocal critic of Wall Street’s high fees and in his shareholder letter out this month he says:
Over the years, I’ve often been asked for investment advice… My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion…However, none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them… Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.
There you have it. People are obsessed with listening to Warren Buffet, and that is probably a good thing. Thanks to the (failing) mainstream news and business media, and gurus like Warren Buffet, investors large and small are getting the message about this simple investing wisdom. And they are adjusting their portfolios accordingly.
Incidentally, my employer… finally… months after I rolled over my 401K, got around to switching our plan to one that includes a low cost S&P fund. You’re welcome, co-workers. Speak up if your 401K is garbage! If my little company was finally able to fix our 401K situation, then I promise you, any company can. The more employees that make this demand, the closer these greedy retirement scams will be to extinction.
Congress will not put your interests above Wall Street’s anytime soon. Unfortunately, Wall Street is a lot better at occupying the White House than the people are at occupying Wall Street. So be vigilant and look out for yourself. When laws are written by corporations, voting with your wallet really is all you can do sometimes.
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